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Loan Crisis Entangles Freddie Mac

Losses at Freddie Mac underscored the continuing turmoil in the housing industry yesterday, and other developments reinforced the sense that conditions would not improve soon.

Freddie Mac, the big mortgage finance company, posted a $2 billion loss for the third quarter and warned that it might not have enough capital on hand to cover the mandatory reserves for its mortgage commitments.

The company has been battered by a rising wave of foreclosures tied to subprime mortgage defaults, and it is “seriously considering” cutting its stock dividend.

Freddie’s misfortune is particularly rattling because the company is considered something of a backstop for the lending industry. With its implied guarantee of government backing, the housing market looks to Freddie, and its bigger sibling, Fannie Mae, to provide stable credit and financing for a wide swath of mortgages.

The loss included a provision for credit losses of $1.2 billion, and it wrote down the value of some assets by $3.6 billion. And Freddie’s outlook remained cloudy: executives said they did not expect earnings to improve in the fourth quarter, and they suggested that the government would not lower its 30 percent threshold for Freddie’s reserves.

Shares of the company plummeted 28.7 percent, to $26.74, its lowest level in 11 years, while shares of Fannie Mae dropped 24.8 percent. Freddie will seek advice from Goldman Sachs and Lehman Brothers for its short-term efforts to shore up its reserves.

While many analysts said the poor earnings suggested that subprime problems had spread to new corners of the mortgage market, some said that they did not anticipate a significant tightening in Freddie’s lending standards.

“One of the reasons why they are trying to do a significant capital raise is they want to be out there continuing to provide credit,” said Frederick Cannon, a managing director at Keefe, Bruyette & Woods, who covers the housing sector.

But the agencies’ exposure could also restrict the government’s ability to intervene in the market.

“It makes any potential large federal response that much more difficult,” said Joseph Brusuelas, chief United States economist at IdeaGlobal. “If the federal government were to respond aggressively to a greater-than-expected downturn in the housing sector, it would rely on Fannie and Freddie to do a lot of the heavy lifting.”

In Freddie’s case, the company warned about more problems in the coming months. “Without doubt, 2007 has been an extremely difficult year for the country’s housing and credit markets,” Richard F. Syron, Freddie Mac’s chairman and chief executive, said in a statement.

Mr. Syron was not alone in his lament. D. R. Horton, the nation’s largest home builder, reported a $50.1 million loss in its fiscal fourth quarter as the housing downturn pummeled its inventory, good will and land-use contracts.

Lower demand and tighter lending standards have cut back the company’s business and caused many clients to cancel contracts.

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“We expect the housing environment to remain challenging,” Donald R. Horton, the company’s chairman, said in a statement.

The subprime debacle also claimed another prominent casualty yesterday. The chairman and chief executive of H&R Block, Mark Ernst, said he would resign amid the company’s difficulties with subprime exposure. Mr. Ernst had come under fire for the failed sale of the Option One Mortgage Corporation, a company subsidiary that took heavy losses on risky loans.

His successor as chairman will be Richard C. Breeden, the former chairman of the Securities and Exchange Commission, who was recently elected to H&R Block’s board after sharply criticizing Mr. Ernst.

The chief executive slot will be temporarily filled by Alan M. Bennett, a former top executive at Aetna, the insurance company.

And home-building data released yesterday offered no hint of an end to housing troubles. Permits to break ground fell 6.6 percent in October to their lowest level in more than 14 years, a sign that builders are cutting back on residential home projects.

Permits have dipped nearly 25 percent since last October, to a seasonally adjusted 1.18 million annual rate, the Commerce Department said.

New residential construction grew slightly last month, rising 3 percent, to an annual pace of 1.23 million. It was the first increase in four months, but the increase came mostly from a 44 percent jump in multifamily developments, like condominiums.

Construction of single-family homes dropped again last month, and housing starts over all remain near their lowest level since the recession of the early 1990s. “With mortgage financing further constrained and inventories of unsold homes quite high, the near-to-medium term outlook for housing starts is not good,” Joshua Shapiro, chief United States economist for MFR, wrote in a research note.

That would be unfortunate for Freddie Mac, whose mortgage-related securities rapidly lost their value as the subprime market began to collapse. Freddie lost $3.29 a share in the third quarter, compared with a loss of $715 million, or $1.17 a share, in the period a year earlier. The company also said it did not expect earnings to improve in the fourth quarter.

“We’re not happy about this,” Mr. Syron, Freddie’s chairman, told investors and shareholders on a conference call. “We don’t expect you to be happy about it.”